NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Does the Investment Model Explain Value and Momentum Simultaneously?

Andrei S. Gonçalves, Chen Xue, Lu Zhang

NBER Working Paper No. 23910
Issued in October 2017
NBER Program(s):Asset Pricing, Corporate Finance, Economic Fluctuations and Growth

Two innovations in the structural investment model go a long way in explaining value and momentum jointly. Firm-level investment returns are constructed from firm-level accounting variables, and are then aggregated to the portfolio level to match with portfolio-level stock returns. In addition, current assets form a separate production input besides physical capital. The model fits well the value, momentum, investment, and profitability premiums jointly, and partially explains the positive stock-investment return correlations, the procyclicality and short-term dynamics of the momentum and profitability premiums, and the countercyclicality and long-term dynamics of the value and investment premiums. However, the model fails to explain momentum crashes.

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Document Object Identifier (DOI): 10.3386/w23910

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